DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION), CIRCLE - 1(1), BENGALURU vs. APPLIED MATERIALS INDIA PRIVATE LIMITED, BENGALURU

These appeals are filed by DCIT, (International Taxation), Circle 1(1), Bangalore (the ld. AO) against the appellate order passed by the CIT(Appeals)-12, Bangalore [ld. CIT(A)] dated 29.4.2024 wherein the appeal filed by the assessee against the assessment order passed u/s. 201(1) & 201(1A) of the Income Tax Act, 1961 [the Act] dated 20.3.2020 was allowed.

The ld. AO is aggrieved against the same and has preferred the appeals raising the following grounds in ITA No.1293/Bang/2024:-

“ 1. Whether on the facts and in the circumstances of the case and in law, the CIT(A) was right in concluding that the services rendered does not fulfil the criteria of "make available" as mandated under the DTAA, hence the payment could not be considered as fee for technical services/fee for included services? 2. Whether on the facts and in the circumstances of the case and in law, the CIT(A) was right in reiterating its finding in relation to the compliance of make available? 3. Whether on the facts and in the circumstances of the case and in law, the CIT(A) was correct in holding that the relationship between the secondee and the assessee is employer-employee? 4. Whether on the facts and in the circumstances of the case and in law, the CIT(A) is justified in relying on order of the Hon'ble High Court in the case of M/s. Abbey Business Services India (P) Ltd. which is distinguishable from the facts of the case of M/s. Centrica India Offshore P Ltd. ? 5. Whether on the facts and in the circumstances of the case and in law, the CIT(A) was right in ignoring the various clauses of the Agreement which signified that the overseas entity through the employees rendered technical, managerial and consultancy services, thus satisfying FTS as per the provisions of section 9(1)(vii) of the Act and also under DTAA?”

The brief facts show that Applied Materials India Pvt. Ltd. is an Indian company engaged in business of providing software development and engineering services including technical product & support services and design services to Applied Material Inc., USA. The assessee is a wholly owned subsidiary of US company.

A survey u/s. 133A of the Act was conducted on 28.8.2018. During the course of survey, it was found that assessee makes payment for reimbursement of salary cost of seconded employees to its US holding company without deduction of tax at source u/s. 195 of the Income Tax Act, 1961 [the Act]. The ld. AO held that reimbursement made of salary cost is taxable as Fee for Technical Services [FTS] and as per provisions of section 195 of the Act, tax was deductible at source. A show cause notice was issued on 3.9.2018. The assessee submitted that there is no tax required to be deducted at source. However, the ld. AO held that assessee has entered into a secondment agreement with its principal AE for secondment of personnel with requisite qualification. As per the terms of agreement, the assessee reimburses the salary cost of seconded employees to its AE. The AO was of the view that the argument of the assessee that it is at cost and reimbursement of salary cost does not have any income element was rejected. The ld. AO in the end held that assessee is required to deduct tax at source on the reimbursement of salary to its AE. Accordingly it was found that a sum of Rs.283,21,149 is the total reimbursement, tax deduction at source u/s. 201(1) @ 10.506% was worked out at Rs.29,25,421 and further interest u/s. 201(1A) of the Act was computed at Rs.26,45,931. Accordingly for AY 2013-14, the order was passed on 20.3.2020.

The findings of the ld. AO are as under:-

The assessee aggrieved with the above order preferred appeal before the ld. CIT(A), who passed the order on 29.4.2024. Before the ld. CIT(A), it was contested that this issue is covered in favour of assessee by the order of the coordinate Bench of ITAT in its own case for AY 2015-16, 2017-18 in which the ITAT has restored the matter back to the file of ld. AO to consider the issue afresh, in view of the decision of Hon’ble jurisdictional High Court in the case of Flipkart Internet P. Ltd. v. DCIT. The AO was further directed to examine whether the assessee has deducted tax at source u/s. 192 of the Act on salary paid to the seconded employees in its entirety. If the assessee is able to prove that it had deducted tax at source on such salary payment, then no disallowance shall be made u/s. 40(a)(i) of the Act for non-deduction of tax at source u/s. 195 of the Act. The ld. CIT(A) after considering the decision of the Hon’ble Karnataka High Court in the case of Flipkart Internet P. Ltd. asked the assessee to produce proof of making TDS in respect of seconded employees. The assessee submitted that in this year there is only one seconded employee viz., Aninda Moitra and also produce Form 16 showing TDS of Rs.1,19,10,290. Therefore, the ld. CIT(A) after considering the decision of Hon’ble jurisdictional High Court, ITAT order and other judicial pronouncements held that requirement of making TDS on such payment does not arise. Secondly no interest can be sustained. He allowed the appeal of the assessee.

The ld. CIT(A) decided the issue as under:-

The ld. AO aggrieved by the order of the CIT(A) is in appeal before us. Though several grounds were raised, but the ld. DR could not point out any infirmity in the order of the ld. CIT(A) when the issue is covered in favour of assessee by the decision of coordinate Bench in assessee’s own case for 3 assessment years.

The ld. AR supported the order of the ld. CIT(A) and submitted that when the ld. CIT(A) has followed the order of the coordinate Bench in assessee’s own case as well as the decision of the Hon’ble jurisdictional High Court, there is no infirmity therein.

We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. The ld. CIT(A) has followed the decision of the coordinate Bench in assessee’s own case and held that no tax is required to be deducted at source on reimbursement of salary on seconded employees on cost to cost basis. The ld. CIT(A) further followed the decision of Hon’ble jurisdictional High Court. Therefore, we do not find any infirmity in the order of the ld. CIT(A) in holding that no tax is required to be deducted at source by the assessee on such payment made to its AE. Accordingly, the order of the ld. CIT(A) is upheld.

The facts relating to AYs 2014-15, 2016-17 & 2017-18 are also identical. Both the parties confirmed that the issue is covered by the decision of the coordinate Bench in assessee’s own case as well as Hon’ble jurisdictional High Court. Therefore, as we have already held that no tax is required to be deducted at source on payment of reimbursement of salary to seconded employee u/s. 195 of the Act, consequently the order passed u/s. 201(1) & 201(1A) of the Act are quashed.

Accordingly the order of the ld. CIT(A) for all these years are upheld.

In the result, all these 4 appeals filed by the Revenue are dismissed.